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Capacity challenge

19 August 13

In association with Wright, Johnston & Mackenzie, some key features of the current picture in renewable energy, as the industry attempts to meet ambitious Government targets

by Fraser Gillies, Susan Hoyle, Graham Bell

Investment in renewables in Scotland has continued to grow. Recent figures suggest that Scotland now generates 6.144GW of electricity from renewables, and that the
industry supports around 11,000 jobs, including those in the supply chain: see www.scottishrenewables.com/scottish-renewable-energy-statistics-glance/

This is despite the recent headwinds created by a combination of factors causing uncertainty in the market. For example, the detail of long-anticipated changes to the financial incentives for renewables projects in the form of the proposed “contracts for difference” mechanism, has only recently been published. Earlier this year saw publication of the draft Scottish Planning Policy, which on the face of it appears to give greater support for minimum separation distances from towns and villages (a potential issue for those wishing to develop community-owned projects), and to large parts of the country being identified as “wild land”, which are not presently subject to any form of statutory designation and on which no consultation has taken place. Lastly, there is the small matter of the forthcoming referendum and what impact, if any, that might have on the current Scottish Government support for investment in renewables.

Progress against targets

The present Government has set challenging targets for 2020, and we are still some way from meeting those. A significant amount of capacity is in planning or has been consented (on the face of it, sufficient to meet the targets), but the lack of suitable grid infrastructure and available connections in certain parts of the country, as well as continuing challenges in securing finance, means that large chunks of that consented capacity may never be delivered, and certainly not by 2020.

Future development of onshore wind is likely to be concentrated in fewer, larger schemes, or extensions to existing schemes, as capacity (not only in terms of grid and other infrastructure but also in relation to the capacity of the landscape to accept more development) becomes an issue, and there is less scope for many smaller schemes spread across a wider area. A significant amount of offshore wind capacity remains to be realised, with some 4GW in planning and a further 6GW yet to enter the planning system.

In hydro, while there is unlikely to be potential for many new large-scale pumped hydro storage schemes, there remains considerable untapped potential for smaller, often community-owned schemes.

The marine sector remains relatively immature, with considerable work still to be done on the various emerging technologies and the principal challenge being to secure funding to further develop the technology, although consents have been issued for a number of projects already and leases are in place with the Crown Estate for many more. Environmental impact assessment of offshore projects is complex, the process is hugely expensive, and the level of detail being required by consultees is significant, reflecting the emerging understanding of the impacts of deploying technology in a marine environment.

Estimates as to the untapped potential off Scotland’s shores vary, and a recent report put the potential at 1.9GW – still a significant amount, but far less than the previous suggested figures. Nevertheless, the Scottish Government remains clearly committed to investment in the sector, and various sources of funding are available. The creation of a one-stop shop for consenting of marine projects, and the recent proposed regulations to bring the mechanism for appeals against decisions on marine licensing in line with the process applicable to other forms of energy generation, are to be welcomed.

Community and locally-owned renewables

The Scottish Government has set a target of 500MW to be generated from community renewables projects by 2020. There is therefore a clear desire that community-owned schemes should play a material part in reaching the 2020 targets. Significant opportunities for smaller scale developments and community involvement in all forms of renewables projects remain.

There are a number of points that those advising community groups or landowners wishing to bring forward smaller schemes might wish to bear in mind. Some community groups have far-sighted aims as to how to use the revenue generated from a development. When communities organise their project vehicle as a charity, there is a very important trade-off. There is a considerable tax advantage for income generated by a charity, but the trade-off is the restrictions within which charities operate regarding use of income.

The overall test is public benefit. A community might decide that sponsoring young people to gain work or life experience will have worthwhile long term benefits. This might well be the case, but such spend is initially about the sponsored individual and so is unlikely to pass the public benefit test.

Alternative structures

There are opportunities for landowners to put in place more sophisticated structures for tax planning reasons.

The normal model of option for lease (with the lease implemented once planning permission is granted) creates a rental stream for the landowner, taxable as investment income. For inheritance tax purposes, the leased land will form part of the landowner’s estate on death, with the result that the value of the land, which could be considerable, will potentially be subject to inheritance tax at 40%. In addition, if the leased land is part of a larger farm or estate, the rental stream from the leased land could prejudice the availability of the inheritance tax relief, business property relief, which might otherwise be available in respect of the whole farm or estate.

Consequently, it has become fashionable for a landowner to insist on a joint venture arrangement (usually in the form of a limited liability partnership (LLP) with the developer). The landowner will lease the land to the LLP, but the main return comes from LLP profit share rather than rental income. The aim is to create a valuable asset (the landowner’s interest in the LLP) that benefits from business property relief for inheritance tax purposes and so does not form part of his taxable estate on death.

There are alternatives to the joint venture LLP structure. For example, the landowner’s potential inheritance tax liability could be mitigated if he transferred the land, and the benefit of the rental stream, to his children and/or grandchildren. Suitable structures to protect the asset can be put in place. Or, if the landowner wanted to retain the benefit of the rental income, he could take out an insurance policy to provide a sum of money on his death to meet the potential inheritance tax liability on the land.

The route by which the developer is funding a project is also relevant to the structure. On default, lenders will claim prior rights to the project. Not only might lenders object to complicated structuring, but the downside of default needs to be contemplated from the outset.

The broader picture

Finally, the decision as to how to structure a particular project is one that should be taken after a wider consideration of issues of succession and long term business planning for the family, who are often likely to inherit an asset which will be generating a return for several decades. It is important that landowners take appropriate specialist advice, and good advice does not insist on just one solution when others might be more mutually convenient for landowner and developer.

Fraser Gillies (partner) is head, and Graham Bell (partner) and Susan Hoyle (partner) are members of the renewables team at Wright, Johnston & Mackenzie LLP 

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